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Politics : Formerly About Advanced Micro Devices -- Ignore unavailable to you. Want to Upgrade?

To: Tenchusatsu who wrote (231079)	4/29/2005 7:45:10 AM
From: Road Walker	Read Replies (2) \| Respond to of 1572132

The Bush admin can take credit for your future... stagflation. The Economy \| Bad flashbacks cloud outlook By Andrew Cassel Yesterday was another bad day for expectations. The economy grew more slowly than expected in the first three months of the year, the government said in announcing its first estimate of gross domestic product. GDP was clocked at an annual growth rate of 3.1 percent, the slowest pace in two years and a sharp drop from 2004's overall pace of 4.4 percent. At the same time, a key gauge of inflation for the same period was higher than expected. The latest data showed essential prices rising at a 2.2 percent rate compared with 1.5 percent for all of last year. So what do these numbers tell us, other than that whoever decides what's "expected" needs a new crystal ball? Typically, the answer depends on whom you ask. For economists such as Peter Morici of the University of Maryland, the latest data were bad news indeed. "Stagflation is rearing its ugly head," Morici said in an e-mail. You may remember stagflation, or you may have it confused with stalagmites and stalactites. The term emerged to describe a particularly depressing state of affairs back in the 1970s, and I don't mean leisure suits. Before that decade, economists believed inflation went along with fast economic growth. If growth faltered, it was expected that inflation's spiral of rising prices and wages would halt as well. That '70s show: Stagflation But those expectations were incorrect. For several years in the '70s, the U.S. economy registered double-digit rates of inflation while barely growing at all. It was stagnation with inflation. Stagflation ended only after the Federal Reserve hoisted interest rates to the stratosphere. That provoked a deep, nasty recession, which shocked both consumers and businesses into changing their own expectations about future wage and price hikes. Ever since, economists have wondered if stagflation was a onetime phenomenon, or something that could get loose again. It's been an academic debate for the most part. Over most of the last 25 years, inflation has been a decreasing source of worry. Overall price levels stabilized, with some things (mainly services such as health care and education) rising fast while others (especially high-tech goods such as computers) falling dramatically. Many credit the deft hand of Alan Greenspan. Under his leadership, the Federal Reserve has been quick to adjust interest rates whenever needed to head off inflation, while providing the economy with enough monetary fuel to grow. But lately, even some Greenspan fans are starting to wonder if the Fed could find itself in the same pickle it faced in the 1970s. Recurring economic symptoms Now as then, world oil prices have risen to record levels. Also now as then, the exchange value of the U.S. dollar is falling internationally, thanks to America's "twin deficits" in trade and the federal budget. That has created pressure on prices, which in turn makes workers increasingly unhappy about their wages. If it all heats up, the result could be another inflationary spiral. The Fed has tried to get ahead of all this with its yearlong string of rate hikes, which lifted short-term rates from 1 percent to 2.75 percent. But the latest signs still point to accelerating inflation. Morici says that means "the Fed faces a Hobson's choice: They must either tolerate oil-price driven inflation or unacceptable levels of unemployment." Either way, there will be pain. Higher inflation annoys consumers and erodes stock prices, making investors unhappy. But hiking up interest rates would hit the mortgage market hard and could burst what some fear is a bubble in house prices, leaving millions of Americans with sharply less tangible wealth. Of course, this may all be too pessimistic. Plenty of smart economists expect a much milder outcome - a small slowdown in the pace of growth and a modest further increase in interest rates. Expectations, however, have been known to be wrong.